India's stockmarket

Against the odds

The market shrugs off some bad news

ONE might have expected investors in the Indian stockmarket to be worried. Pushed by the high price of oil, inflation has been rising. On October 26th, the central bank, the Reserve Bank, responded by edging up its “repo” rate by 0.25 percentage points, the first such increase for four years. The Reserve Bank has also cut its GDP-growth forecast for this year by 0.5 percentage points, to 6-6.5%. The government, led by the Congress Party, is a further concern. It relies on the parliamentary support of Communist allies, not known for their market-friendly policies.

Indeed, when it took power in May, there were a few days of market mayhem. Yet since then, the index has recovered most of its losses, and is almost back to its levels at the end of last year when, after an exceptionally good summer monsoon, the economy was booming and India was said to be “shining”. Encouraged by a 25% rise in the market since May, firms are queuing up to raise money on it (see chart).

Prithvi Haldea, of Prime Database, a financial-research firm, estimates that, of the money going into the stockmarket, about a quarter comes from small investors, a quarter from Indian firms and rich individuals, and half from foreign and local institutions.

Many retail investors were put off the market by the last new-issue boom, in 1994-6. Many of the issues were duds, frauds, or both. This time, quality is not the problem. A relatively small number of India's biggest and best-known public and private companies have come to market to sell minority stakes. In recent weeks they have included offerings worth more than $1 billion from both Tata Consultancy Services, the country's largest information-technology services firm, and National Thermal Power, a government-owned electricity generator.

Prime Database lists more than 80 firms in its pipeline of pending issues, waiting to raise more than 400 billion rupees ($9 billion). Despite the Communists' qualms about privatisation, the government will continue to sell shares in the firms it controls—especially banks, many of which are compelled by new capital-adequacy rules to raise money. But much the chunkiest offering in the list, accounting for maybe a quarter of the total amount, is for the telecommunications arm of Reliance, India's largest private firm.

If the supply of new issues seems assured, brokers also expect demand to rise. After the upsets of the mid-1990s, a very small proportion (perhaps 1.5%) of household wealth is in the stockmarket, and there are only 6m retail investors. Pension reform is likely to release more money for investment. Banks, which at present typically keep 35-40% of their assets in government bonds, have been losing money on their portfolios as yields have risen, and may put more into equities.

Foreign institutions are paying more attention. Pashupati Advani, a Mumbai stockbroker, expects foreign interest to increase in the next couple of years as Taiwan and South Korea graduate from emerging-market indices, giving India a greater weight.

The stockmarket, says Mr Haldea, is still “very small and shallow” given India's size. That is a reason for optimism. But, as in those panicky days in May, on one of which the index plummeted 17%, it also makes it vulnerable to sudden shocks and swings of sentiment. India is flavour of the month for some; but tastes change.